Effects Of The Ethanol Mandate On The Price Of Corn

RENEE MONTAGNE, host:

Ethanol has been hailed as one cure for what President Bush calls America's addiction to oil. Last year, in fact, Congress and the president dramatically increased the amount of ethanol that refiners must blend into gasoline.

Now that ethanol mandate, as it's called, is causing a backlash. NPR's Christopher Joyce has the story.

CHRISTOPHER JOYCE: What refiners must do next year is blend nine-billion gallons of renewable fuel - that's mostly ethanol - into gasoline. That's a huge increase over the status quo. To make all that ethanol, you need corn, lots of it. Demand has pushed corn prices to record highs. So if you've got cattle to feed or corn chowder to make, it's costing you more.

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Texas decided enough was enough. The governor asked the federal government last April to cut his state a break and lower the ethanol mandate by half. Now he's got allies, lots of them, such as the Grocery Manufacturers Association. Here's vice president, Scott Faber.

Mr. SCOTT FABER (Vice President, Grocery Manufacturers Association): The price of corn has risen so dramatically that it is not only things made from corn and things that are fed corn that have increased, but it's created an intense competition for land that has increased the price of soybeans and other basic commodities that are used to make foods.

JOYCE: Foods like milk, eggs and meat. Faber says 60 percent of the cost of a chicken is the corn it eats. One economic analysis done for the food industry says the ethanol mandate's effect on demand for corn has pushed food prices as much as 35 percent higher than they would be otherwise.

Now, it's true that high oil and gas prices also make food more expensive. You use petroleum to make fertilizer and packaging and to ship food around, but Faber says the high cost of corn hurts more.

Mr. FABER: Most of the cost of producing food is the ingredients used to make the food and the cost of paying people to make the food. Less than 10 percent of the cost of making food - generically, it varies a lot, depending on the product - is energy and transportation cost.

JOYCE: But since when do economists agree on anything? South Dakota's governor, Michael Rounds, wants to keep the ethanol mandate, and he's got his own economic analysis. That says ethanol is not having such a big effect on food prices.

Governor MICHAEL ROUNDS (Republican, South Dakota): The most recent numbers that I've seen may attribute as much as five percent of the increases in cost to ethanol versus other input costs.

JOYCE: Other input costs being high prices for gas and diesel and drought in the U.S. and abroad. Rounds notes that few people in South Dakota will complain that corn growers are doing better than they used to, and he asks why not pay Americans instead of OPEC for our fuel?

Governor Rounds chairs the Midwest Governors Association, and they say the ethanol mandate will encourage new distilling technology to replace corn with something cheaper that people don't eat.

Gov. ROUNDS: It would be able to use the entire corn plant, not just the cereal that comes from corn that we see as a corn kernel. The same way with switch grass.

JOYCE: Everybody in this fight tends to choose the numbers that suit them. Corn affects meat prices, for example, but not fruits and vegetables. But this has become more than a food fight. Oil refiners don't like the government telling them how much ethanol to blend into gas. In fact, if refiners could get rid of ethanol, they could improve profits. At least that's what oil economist Phil Verleger says.

He did a study for ethanol opponents. He says it works like this: Out of every barrel of oil, you get a set amount of gasoline, diesel, jet fuel and fuel oil. Right now, sales of the diesel and jet-fuel portions are the most profitable -a lot more so than gasoline.

Now, if refiners didn't have to add ethanol to gas, they'd have to make more gas. They'd buy more crude oil to make it, says Verleger.

Mr. PHIL VERLEGER (Oil Economist): And in processing more crude oil, they will then be also producing more jet fuel and more diesel fuel.

JOYCE: Which means more nice-looking profit margins and more gas for consumers. Verleger calls this an unintended consequence of the push for more ethanol.

Mr. VERLEGER: I've got to tell you, nobody thought of this when this thing first came through, and it was only after watching this year, watching the markets for a little while, that this whole thing started to become apparent.

JOYCE: The Federal Environmental Protection Agency is weighing the Texas request to reduce the mandate and is expected to rule within weeks. Christopher Joyce, NPR News. Transcript provided by NPR, Copyright NPR.